Crack Down on Daigou Merchants

China’s E-Commerce and Daigou Merchants

China’s E-commerce has grown exponentially in recent years due to the strong demands by local consumers for premium brands and high quality products from overseas. This growth is threatened since a large amount of shopping is done through Daigou merchants.

The term Daigou means to buy on behalf. A person outside of China purchases commodities for a person living in China. The term can be traced back to the year 2005. It was used to refer to overseas travellers and students who brought back home foreign goods for their families. Since the Chinese government applied high taxes on foreign goods, Daigou was a niche market.

One of the things that made Daigou merchants popular was the outbreak of the “Sanlu Poisonous Milk Powder”. This incident occurred in 2008. Due to this incident, there was a drop in the trust of Chinese consumers towards Chinese brands. This drop in trust led to the rise in demand for foreign (often Dutch) milk powder and other kind of foreign goods.

New Policies for E-Commerce and Tax

From the 1st of January 2019, new policies regarding Chinese-e-commerce and new laws on Daigou merchants will come into effect. According to the new e-commerce policy, China’s ministry of finance will add 63 categories of products to the list of goods. Some goods are duty-free when purchased via cross-border e-commerce platforms. These include popular consumer goods such as : electronics, food as well as healthcare & cosmetics. 1,321 items are covered in total by the list of duty-free cross border e-commerce products because of the new policy.

The tax-free quota will rise by 150 percent from RMB 2,000 (US$291.62) to RMB 5,000 (US$729.05) in a single transaction. Consumers that buy high-value products will benefit more from the higher single transaction limit. Annual quota of individual consumers will be loosened by China on cross-border e-commerce to RMB 26,000 (US$3,791.06), up from RMB 20,000 (US$2,916.20) previously. The annual quota will be increased by the ministry as the overall national income grows in the future.

New Regulations for Daigou Merchants

Due to the tremendous tax revenue the Chinese authorities loses on Daigou merchants, Chinese government has obligated Daigou merchants to register and pay taxes from the 1st of January 2019. Daigou merchants are now to obtain licenses and formally register as businesses else they will have to pay fines for illegal business and tax evasion. To make sure this is effective, inspections on Daigou merchants have reportedly been doubled down at airports by Chinese customs and some have been imprisoned on the charges of tax evasion.

Impact

The new policy initiative will benefit consumers in China. Compared to Daigou sellers, the consumers will benefit from the credibility and authenticity of retailers and their products on cross-border e-commerce platforms because of stricter rules.

One of the things that the Chinese government plans to achieve by coming down heavily on Daigou merchants is to collect more taxes from cross-border e-commerce imports. To avoid paying taxes, most Daigou merchants have in the past declared their imports as personal items. Daigou practice has been estimated to be worth tens of billions a year, this means that tremendous tax revenue are being lost by authorities on these transactions.

Foreign Retailers

With China’s crackdown on Daigou, foreign retailers will also benefit. In the past, purchases made through Daigou merchants benefited consumers by helping them to save on import duties, this gave them an advantage over traditional retailers. This means that China’s push for regulation of Daigou is also likely going to be welcomed by overseas retailers. As a matter of fact, the transparency in regulation is a positive development given the online commerce push by major foreign retailers.

In addition, the crackdown on Daigou merchants will make Daigou purchases pricier. This means that products that are being sold by foreign retailers will become more competitive for Chinese consumers. Products sold by Daigou are put at a competitive advantage over legitimate sellers that paid taxes because they generally have evaded taxes.
With the crackdown on them, Daigou merchants will likely take a break on short term and see if the authorities continue to enforce the new policies.

Another party that would benefit are those selling via legitimate cross-border e-commerce channels in China. Due to expanded preferential policies and support, they will benefit against grey-area competitors and counterfeiters.

With the new e-commerce regulations, especially the ones on Daigou merchants which has taken effect on January 1 2019, it is the aim of China that the oversight and regulation of its e-commerce market will be improved.

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